Barings, 1995

One trader, both sides of his own desk

A single trader in Singapore ran both the trading and the settlement of his own book, which meant nothing he reported had to be true. What began as concealed errors became a very large bet that the Nikkei would stay in a range, funded by short options and by margin wired from head office against positions nobody had reconciled. The Kobe earthquake broke the range, the losses reached about £827m, and a 233-year-old bank was sold for one pound.

Open in the app · Case Studies · intermediate

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What the lesson covers

1. What happened
2. The position
3. Why it broke
4. What it cost
5. What it teaches

Key terms

• Segregation of duties — Keeping trading, confirmation and settlement in separate hands so no one person can both trade and record.
• Error account — An account for correcting mistaken bookings, and here the place concealed losses were parked.
• Short straddle — Selling a call and a put at the same strike: premium now, unbounded loss if the market moves far.
• Index arbitrage — Trading the same index future on two exchanges for a small price difference, with little directional risk.
• Reconciliation — Checking the firm’s records against the exchange’s and the cash actually paid — the control that was absent.
• Operational risk — Loss from failed processes, people or systems, as distinct from market or credit risk.

In practice

The direct legacy is structural: independent middle and back offices, mandatory leave for traders, position reconciliation against exchange records, and limits monitored by people who do not report to the desk. Every one of those exists because they were all absent in one place at one time.

Read next

• OTC Equity Option — A custom, bilaterally negotiated option
• Société Générale, 2008 — Fictitious hedges, and a €4.9bn exit
• Execution and Reporting — How a trade gets done, and who has to know about it

In the app, Barings, 1995 carries a five-step lesson, a worked example and a bank of twelve questions drawn differently every sitting.

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